use of economic instruments for promoting sustainable development

USE OF ECONOMIC INSTRUMENTS FOR PROMOTING SUSTAINABLE

DEVELOPMENT

Veiko Tali, Deputy Secretary General, Ministry of Finance

11th of April 2006

Ministry of Finance of Estonia

2Ministry of Finance of Estonia

Part of economic growth in our country is achieved through policies that allow and sometimes even encourage businesses and people not to think and act in a sustainable way.

We are in the very beginning of a road which leads to sustainability. Our energy sector bears the main responsibility for pollution and using natural resources. In 2003 the energy sector was responsible for using 93% of all the water used in Estonia, emitted into air 92% of all the pollutants and 73% of all the waste. Those numbers indicate clearly the environmental burden caused by the energy sector.

SUSTAINABLE DEVELOPMENT IN ESTONIA


At the same time the percentage of renewable energy sources in electricity production is still marginal (above 1%).

The non-sustainable policy has not helped us to solve the most important environmental problems. Estonian CO2 emission per capita is 11,3 tons in a year which is about 1,5 times higher than the ‘EU average’ respective figure.

“Cheap electricity” has caused the low effectiveness of energy use (the amount of GDP produced when burning one tonne of fuel). According to Estonian Human Development Report the Estonian economy is 4 times less effective than in Finland, lagging ten times behind Japan or Denmark.

SUSTAINABLE DEVELOPMENT IN ESTONIA

4

ENVIRONMENTAL BURDEN OF ELECTRICTY PRODUCTION: ASH HILLS IN EASTERN PART OF ESTONIA


In spring 2005 a broad-base working group was established for working out the principles of the tax reform which were presented to the government.

The concept was discussed and in principle approved at government cabinet meeting held on 7th of July 2005.

ECOLOGICAL TAX REFORM AS A TOOL TO ACHIEVE SUSTAINABILITY

TAX

POLICY

ENVIRONMENTAL

POLICY

TAX SYSTEM – for what ?

I FISCAL ASPECT - REVENUE

II POSITIVE

AFFECT ON

BEHAVIOUR


A partial re-orientation of taxes from taxation of income to taxation the use of natural resources and pollution of nature. The broader goal of the tax reform concept is to improve the competitiveness of Estonia, support the economic development and reduce unemployment.

Another basic principle is that the overall tax burden has to remain the same – this means that the rise of environmental taxes and fees has to be balanced with decreasing of income tax.

KEY PRINCIPLES OF THE ETR CONCEPT


Income tax rate 1994 - 26 % (flat rate) 2005 – 24%

2006 – 23%, 2007 – 22 % 2008 - 21 %

2009 - 20% Corporate income tax /1999/ only on outpayments

(dividends) (0 % rate on retained earnings)

INCOME TAX (1)


Increase of non-taxable income : 2004 - 16 800 EEK in a year (1074 EUR in a year) 2005 – 20 400 EEK in a year (1304 EUR in a year) 2006 – 24 000 EEK in a year (1534 EUR in a year)

INCOME TAX (2)

1111

SOCIAL TAX

• Tax rate is 33 per cent of the taxable amount

• Tax accrues single-purposely to the budgets of state health insurance system (13%) state pension insurance system (20%)

• Social tax payable is personificated and in making pension payments will be taken into account.

Ministry of Finance of Estonia

WE TAX MORE CONSUMPTION AND LESS EARNINGS

23,7 23,0 21,2 21,5 22,1 21,5 19,6 19,0 19,6 20,9 20,5 19,3 18,3 17,6 17,8

12,7 12,312,7 13,4 11,9 11,3

12,0 11,7 12,212,4 12,4 13,6 13,4 13,2 13,1

0

10

20

30

40

1994 1996 1998 2000 2002 2004 2006* 2008*

% GDP

Direct taxes Indirect taxes

33,3% - 640 mln

13

PROBLEMS OF ETR

1) Administration

2) Competitiviness

3) Impact to wealth distribution

4) Measurement (indicators)

5) POLITICAL FLUCTUATIONS

14

TIMELINE OF ETR CONCEPT

YEARS 2005-2006 + ENVIRONMENTAL FEES ACT, July 2005 - EXCISES OF ENERGY PRODUCTS, II half-year 2006 - TRANSPORT TAXES (ANNUAL CAR TAX), 2006 2005 – 2008: IMPLEMENTATION OF ETR I PHASE

2006-2008: EVALUATION OF ETR I PHASE AND PLANNING

OF ETR SECOND PHASE

2009-2013: IMPLEMENTATION OF ETR II PHASE


1. ENERGY TAXES – excise duty on energy products, CO2 emissions charge on production of electricity;2. TRANSPORT TAXES - heavy vehicle tax, state fee for registration of cars; 3. ENVIRONMENTAL FEES - most important of them are pollution charges, water abstraction charge, mineral extraction charges, packaging excise duty and etc.

The main revenue from environmental taxes and fees comes from fuel excise duty (over 80%). Overall the environmentally related taxes and fees constitute about 2,2 % of GDP.

On the next slide there’s a graph about environmental tax revenues by Member State and type of tax in % of GDP (2004).

ENVIRONMENTALLY RELATED TAXES IN ESTONIA

Rahandusministeerium

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

DK CY NL SI LU FI MT PT* SE IT HU** CZ AT UK LV DE IE BE EL PL EE FR ES LT EU-25

EU-15

NMS-10

Energy Transport Pollution/Resources


The graph showed that in Estonia the revenue from environmentally related taxes and fees is comparatively smaller than on an average in the EU countries. In 2004, revenues from environmental taxes in the EU-25 (in the GDP-weighted average) accounted for 2.6% of GDP.

THE REVENUE FROM ENVIRONMENTALLY RELATED TAXES


The new Environmental Fees Act which entered into force on 1 January 2006 contributes to environmental protection much more efficiently.

For exmaple the CO2 emissions charge will rise to 31,3 EEK per tonne for year 2008 (2005 - 11,3 / 2006 – 15,6 / 2007 – 23,5).

The charge for taking hazardous waste to environment will rise from 122 EEK per tonne (year 2006) to 157 EEK per tonne for year 2009. The mineral extraction charge for oil shale will rise from 5,2 EEK per tonne (year 2005) to 12 EEK per tonne for year 2009. On average the water abstraction charge will rise 10% in a year up to year 2013.

INCREASE OF ENVIRONMENTAL FEES

ENERGY PRODUCTS: NATIONAL EXCISE DUTY RATES APPLICABLE TO

MOTOR FUELS AND THE EU MINIMUM EXCISE LEVELS.

ENERGY PRODUCT

Excise rates in Estonia 01.01.2006

The EU minimum levels of taxation

Unleaded petrol

287 EUR (4500 EEK )/1000 l.

359 EUR (5620 EEK)/ 1000 l.

Aviation petrol

72 EUR (1120 EEK)/ 1000 l.

Gas oil 245 EUR (3840 EEK)/1000 l.

4730 EEK (302 EUR)(from 2010 330 EUR 1000 l

Gas oil for specific purposes

44 EUR (690 EEK)/1000 l.

21 EUR (330 EEK)/1000 l.

LPG 100 EUR (1570 EEK)/1000 kg

125 EUR (1960 EEK)/1000 kg

Petroleum

302 EUR (4730 EEK)/1000 l

302 EUR (4730 EEK)/1000 l.

Estonia may apply a transitional period on petrol and gas oil until 2010 to achieve the EU minimum level of taxation.

Estonia may apply a transitional period on petrol and gas oil until 2010 to achieve the EU minimum level of taxation.

FUTURE DEVELOPMENTS – MOTOR FUELS

According to initial plan the excise duty rate of UNLEADED PETROL will be raised from 287 to 359 EUR gradually (three steps: 2008-2009-2010).

According to initial plan the excise duty rate of DIESEL will be raised from 245 to 330 EUR gradually (three steps: 2008-2009-2010).

* - according to ROADS ACT the total amount of expenditure prescribed by the state budget for the financing of road management shall be equal to not less than 75 per cent of the proceeds planned from fuel excise duty (except fuel marked with a fiscal marker) and 25 per cent of the proceeds planned from excise duty on fuel marked with a fiscal marker.

21

EXEMPTION OF BIOFUELS

• The permission which allows Estonia to exempt biofuels from excise duty was issued by the European Commission on 27th of July 2005. It’s valid for six years. The following biofuels only are exempted from fuel excise duty:

1. fuel for which the first four digits of the CN code are 1507–1518 and that are not of synthetic origin (the raw material of biodiesel);

2. fuel which is produced from biomass and for which the eight digits of the CN code are 3824 90 55 or 3824 90 80–3824 90 99 (the raw material of biodiesel);

3. fuel which is produced from agricultural products or from products of vegetal origin and for which the eight digits of the CN code are 2207 20 00 (denatured ethyl alcohol) or 2905 11 00 (methyl alcohol).

HEATING FUELS AND ELECTRICITY

Transitional period until 2013 (2011-50%) on taxation of oil shale.

Transitional period until 2010 on taxation of shale oil and electricity.

Transitional period until 2013 (2011-50%) on taxation of oil shale.

Transitional period until 2010 on taxation of shale oil and electricity.

Energy product

Excise rates in Estonia

01.01.2006

The EU minimum levels of taxation

business non-business

Light fuel oil

44 EUR 1000 l.

21 EUR/1000 l.= 330 EEK

21 EUR/1000 l.= 330 EEK

Heavy fuel oil

15 EUR 1000 kg

15 EUR/1000 kg= 235 EEK

15 EUR/1000 kg= 235 EEK

Petro-leum

302 EUR 1000 l.

- -

Natural gas

- 0.15 EUR/ 2.35 EEK GJ

0.3 EUR/ 4.7 EEK GJ

Coal and coke

0.3 EUR GJ 0.15 EUR/ 2.35 EEK GJ

0.3 EUR/ 4.7 EEK GJ

Electri-city

- 0.5 EUR/ MWh= 7.8 EEK

1 EUR/ MWh = 15.65 EEK

FUTURE DEVELOPMENTS – HEATING FUELS

NATURAL GAS - according to Energy Taxation Directive Estonia does not tax natural gas because the proportion of natural gas in total energy consumption was lower than 15% in year 2001.

From environmental point of view and considering the security of supply (all the gas is imported from Russia) there is no reason why natural gas should not be taxed. We have initial plans to tax natural gas together with shale oil from 2008.

According to excise duty act SHALE OIL is exempted from excise duty if used by households or for district heating purposes. At least from 1st of January 2010 we must tax shale oil used for district heating purposes.

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FUTURE DEVELOPMENTS - ELECTRICITY

At present there are no excise duties on electricity consumption.

In the price of electricity to the end consumer the proportion of all the environmental fees and charges is about 3% which is about 3 times

higher than the EU minimum excise tax rate on electricity.

As the exported electricity could not be taxed with excise and imported electricity could not be taxed with environmental charges in the future

we will probably use a combination of them.


Thank you!

use of economic instruments for promoting sustainable development

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